India-US gift tax impact: What NRIs & expats should know

Any gifts in excess of Rs 50,000 received by an individual, including NRIs, will be taxed in the hands of the receiver.

In an earlier series, we have seen the tax impact for Indian Americans, both in India and the US, on inheriting property in India. Another form of passing on assets to the next generation is gifting. In this article we look at the tax impact of gifts received by NRIs in the US from persons in India.

Tax on gifts - India

Prior to 1998, gifts used to be taxed in the hands of the giver in the form of Gift Tax. However, in 1998, this Gift Tax was abolished. Subsequently in 2004, a new tax on gifts was introduced in the Income Tax Act according to which, tax would be levied, in certain cases, in the hands of the receiver.

According to this provision, any gifts in excess of Rs 50,000 received by an individual, including NRIs, will be taxed in the hands of the receiver. The value of the gift would be added to the receiver's total income and tax would be calculated thereon. This includes cash gifts as well as gifts in kind. For gifts in kind, such as property, jewellery etc., the asset must necessarily arise in India and for valuation purposes, certain rules would apply:

- In case of immovable property, the value will be based on the stamp duty value of the property

- In case of any other property such as shares and securities, jewellery, paintings, work of art etc., value would be based on the fair market value of such property

However, there are some exemptions to the tax on gifts:

- Any gift received from a blood relative is exempt even beyond the limit of Rs 50,000 (relative in this case is defined as spouse, brother or sister, spouse's brother or sister, parents and lineal ascendants of individual or his spouse, siblings of parents of individual or his spouse)

- Gifts received on occasion of marriage are also exempt beyond the limit of Rs 50,000

- Gifts received under Will or inheritance are exempt beyond the limit of Rs 50,000

Note: "For Indians Americans, the Double Taxation Avoidance Agreement (DTAA) between India and the US provides that India will have the first right to tax gifts, wherever applicable. However, the DTAA varies from country to country and NRIs in other countries like UAE or Sweden may note that such gifts will be taxed only in the country of their residence. NRIs must refer to their specific DTAA to see if they can claim relief under the DTAA," explains Vaibhav Sankla, Director, H&R Block India.

Tax on gifts in the US

In the US, tax on gifts is levied in the hands of the donor or person making the gift and not the receiver. Moreover, this only applies where the person making the gift is a US taxpayer, that is, a US resident, green card holder or citizen. Where a gift is made by a person resident in India to a US person, no gift tax is payable as the donor is not a US taxpayer. However, the person receiving the gift, being a US taxpayer, must fill up form 3520 - 'Annual return to report transactions with foreign trusts and receipt of certain foreign gifts'

"Even if there is no tax liability at the time of receiving the gift, US residents, citizens and Green Card holders who receive gifts over $100,000 from someone in India must file Form 3520 along with their tax return," says Rajesh Vaidya, a CPA and Senior Accountant at Florida based Raju Maniar CPA firm. "This applies to financial assets such as cash, investments and also physical assets like property."

"If a US person receives a gift of more than $100,000, Form 3520 should be filed. If the amount of the gift is less than $100,000, then no Form 3520 is required. However, in some cases it is advisable to file the form anyway if the amount of the gift is less than $100,000 so that there is documentation of the transaction to avoid IRS questions in later years," explains Vinay Navani, CPA and director of tax at New Jersey based firm Wilkin & Guttenplan, P.C.

In case the gift is in the form of property, Navani says that the recipient must disclose the fair market value of the property on the date of the gift on Form 3520.

"Filing is mandatory in order to avoid the penal provisions for non-compliance. The requirement of submission is in line with the regular tax return due date or extended date. Moreover, gifts of foreign financial assets exceeding a certain limit will trigger additional reporting in the form of Form 8938 and Form TD F 90-22.1. US taxpayers must be aware of these requirements," Vaidya adds.

US tax planning: Gift versus Inheritance

The tax rules in the US make a very important distinction between property received as inheritance and that received as gift. In case of property (including real estate, shares and securities etc) received as inheritance, the basis or cost to the receiver is taken to be the fair market value as on the date of death of the bequeathor. But in case of property received as gift, the basis or cost to the receiver is taken to be the original basis of the donor. This distinction becomes important at the time of sale of this property by the receiver. In order to calculate capital gains tax, the basis would be different in each case. "Because of this difference, US taxpayers often must weigh both options, that is receiving high value property as a gift and as inheritance. For instance, in cases where the donor is of advanced age, it might be better to allow the property to be received as inheritance where the receiver will get the benefit of higher basis. Of course, this must be evaluated on a case to case basis," Navani advises.

As far as India is concerned, the 'cost' for calculating capital gains in both cases, whether gift or inheritance, will be the cost to the original owner. So tax planning in this case is mainly from the US perspective.

Having seen the tax implications of receiving gifts from India, the next step is to understand tax impact for Indian Americans who make gifts to persons in India. We will tackle that in the next article.